Extreme Asymmetric Volatility: Stress and Aggregate Asset Prices

43 Pages Posted: 25 Feb 2009 Last revised: 21 Jun 2015

See all articles by Sofiane Aboura

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management

Niklas Wagner

Passau University

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2015

Abstract

Asymmetric volatility in equity markets has been widely documented in finance (Bekaert and Wu (2000)). We study asymmetric volatility for daily S&P 500 index returns and VIX index changes, thereby examining the relation between extreme changes in risk-neutral volatility expectations, i.e. market stress, and aggregate asset prices. To this aim, we model market returns, implied VIX market volatility and volatility of volatility, showing that the latter is asymmetric in that past positive volatility shocks drive positive shocks to volatility of volatility. Our main result documents the existence of a significant extreme asymmetric volatility effect as we find contemporaneous volatility-return tail dependence for crashes but not for booms. We then outline aggregate market price implications of extreme asymmetric volatility, indicating that under volatility feedback a one-in-a-hundred trading day innovation to average VIX implied volatility, for example, relates to an expected market drop of more than 4 percent.

Keywords: market volatility, asymmetric volatility, leverage effect, volatility feedback, market stress, financial stability, systemic risk, extreme volatility, aggregate asset prices;

JEL Classification: C32, G10, G32

Suggested Citation

Aboura, Sofiane and Wagner, Niklas F., Extreme Asymmetric Volatility: Stress and Aggregate Asset Prices (January 22, 2015). Available at SSRN: https://ssrn.com/abstract=1348563 or http://dx.doi.org/10.2139/ssrn.1348563

Sofiane Aboura

Université Paris XIII Nord - Department of Economics and Management ( email )

99 avenue Jean-Baptiste
Clément, Villetaneuse 93430
France

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
620
Abstract Views
2,933
rank
36,605
PlumX Metrics